Japanese Investors Expected to Diversify

What will Japanese real estate investors do next?

One thing they may not do is take capitalization rates as low as some local sellers would like. A capitalization rate is a measure of a property’s overall return to an investor calculated by dividing the annual net operating income by the purchase price.

“Japanese investors are getting more selective, they’re looking for more than a 7.5% cap,” said Teruyoshi Eto, executive vice president of Best American Realty Group, whose parent company in Japan is 31-year-old Taiyo Real Estate Co. Ltd.

“Japanese investors are also going to diversify into real estate investments other than downtown office buildings,” said Jack S. Cooper, vice president and managing director of Bank of America’s Investment Real Estate Group.

Yet, John Cushman, president and chief executive officer of Cushman Realty, believes Japanese investment in Los Angeles real estate, primarily in the downtown area, may double to $10 billion to $12 billion during this year. Cushman’s figures show that the Japanese own 28.9% of the downtown office inventory. (About 80% of downtown Los Angeles buildings are now owned by foreign investors.)

Move to Other Areas

Cooper sees Japanese investors eventually moving into shopping centers, apartments and industrial complexes in areas other than their current favorites, Los Angeles, San Francisco, Boston, New York and Washington.

“I’ve advised them to diversify.” Cooper said. “What they’ve done so far has made an awful lot of sense. But now, they should begin looking at other areas, middle-America, even the rust belt.”

Cooper agrees with Cushman in that Los Angeles will continue to be the focal point for Japanese investment.

“A preponderance of Japanese firms are making Los Angeles their top choice for U. S. headquarters,” he said. In addition, a growing number of U. S. East Coast investment firms are expanding their services to Los Angeles to take advantage of the burgeoning Pacific Rim trade.

“The Japanese believe that the Pacific Basin will have two major financial centers, Tokyo and Los Angeles.”

Lower Borrowing Cost

This, he said, will have a positive impact on real estate.

One of the advantages Japanese investors have is their lower cost of borrowing money.

Just how this borrowing works was explained by Eto.

Taiyo can borrow money from a bank in Japan in different currencies. If the firm borrows in dollars the current rate would be about 6.5%. If it borrows in yen, the current rate would be about 3.5%.

However, if the firm borrows in yen it runs a risk of a loss because of a change in currency values. Taiyo can also borrow in the more stable Swiss francs. This would be at a lower cost than borrowing dollars but at a higher cost than borrowing yen.

For some projects the firm uses its own funds.

Were a U.S. company equivalent to Taiyo to borrow money here, it would probably pay an interest rate of about 9.25%.

Taiyo’s loans are short-term and renewable every six months. This type of loan is made by Japanese banks to corporations, and is based on the borrower’s financial strength and not with the bank holding a mortgage.

Sell Partnerships

When Taiyo develops a project it can then sell limited partnerships to Japanese investors. Eto said these investors are looking for about a 14% return.

The firm is now developing six projects consisting of three apartment structures, one 97,000-square-foot office building in Santa Monica, a 49-unit housing project in Anaheim Hills and a 1,000-acre planned community in Mesa, Ariz. Eto said the total value of these projects is $564,700,000.

The firm also produces seminars in Japan on investing in U. S. real estate.